Schroder Global Recovery Fund

 

 

“The one thing in stock markets that never changes is humans…human emotions. We look at the parts of the market that others don’t, won’t or can’t”

– Nick Kirrage 

Overview

The Schroder Global Recovery Fund was launched in Australia on 18 August 2017 but Schroders has been running this strategy globally since October 2013. The fund applies a disciplined value investment approach, seeking to invest in a select portfolio of securities that are significantly undervalued relative to their long-term earnings potential. The Fund invests in companies worldwide that have classic recovery characteristics, these are companies that which trade on low multiples of recovered profits, but where long-term prospects are believed to be good. Its major strength is the disciplined focus  on buying out-of-favour companies at all stages in the investment cycle. While valuation-driven philosophies may fall in and out of favour, over longer time periods this investment style has shown the potential to deliver higher returns. 

 

A successful recovery approach 

Nick Kirrage and Kevin Murphy have been running the highly successful Schroder Recovery Fund for over 11 years. This is a UK based fund with the ability to invest 20% of its assets outside the UK. 

Over the last 10 years the fund has returned 153% compound return, or 9.7% p.a. in GBP. (Please remember that past performance is not a guide to future performance and may not be repeated.) The nature of a true ‘recovery’ strategy can be volatile over short periods, but time and time again over the long term, it has proved its potential to give investors attractive returns.

 

Portfolio summary 

The Fund’s investment objective is to provide capital growth and to outperform the MSCI World Index.

Style Value
Number of securities 30 - 70
Position size Maximum position size 10%
Sector weights Maximum of 35% in any one industry sector
Country weights Maximum of 50% in any one country
Currency Unhedged

 

Key benefits

The benefits of investing in the Fund include:

True diversification in global equities: near zero commonality with most managers offering a pure exposure to deep value ‘recovery’ investing at an attractive price

Unconstrained: The Fund is completely benchmark unaware with a focus on stocks that will deliver absolute returns over the long term 

Contrarian: The Fund adopts a disciplined value driven approach 

Bottom up: The investment team has a strong focus on micro analysis, not macro, using skills in company analysis and valuation 

Low turnover: A thoughtful, patient, investment style, targeting long-term value creation.

An experienced team: Nick Kirrage and Kevin Murphy have also been running the highly successful Schroder Recovery Fund for over 11 years.

 

Quick links

The difficult past decade for value has not won it many friends, and as a result, many investors have abandoned it in favour of different types of strategies. We seek to offer an increasingly unique proposition of being positioned where we believe the potential for performance will be.

 - Nick Kirrage and Kevin Murphy, Fund Managers

 

Investment approach

Recognising the long term benefit of a value strategy, we seek to identify stocks which trade at a substantial discount to their fair or intrinsic value and where we believe that profits growth will surpass expectations. We believe these stocks provide the most attractive investment returns over the long term.

The strategy has a distinct contrarian approach with a focus on stocks that will deliver absolute returns over the long term. It therefore has higher volatility than market indices, though we believe strongly that this is more than compensated for by the potential of longer term outperformance.

Investment process 

Idea Generation

Quantitative screens are used to highlight companies that have underperformed the equity market, are attractive on a variety of valuation measures and have operating returns substantially below their peers.

Fundamental analysis

We believe strongly in the benefits of independent fundamental research. We spend considerable time constructing a model for each company based on at least one cycle’s worth of company report and accounts.  The main aims of the model are:

–       To verify the output of the screening process and / or the veracity of the company’s financial disclosure

–       To understand the main dynamics of the business; operating leverage, cash conversion, sales volatility etc.

–       Investigate balance sheet strength and perform sensitivity analysis

–       Investigate historic levels of profitability and enable conservative modelling of recovery.

Risk Management

We view risk as the probability of permanent financial loss and to achieve superior long term returns, capital losses need to be minimised. We therefore look at risk in absolute terms focusing on three main sources of risk:

We attempt to minimise absolute risk by concentrating on companies with low valuations, resilient earnings and strong balance sheets. This margin of safety is designed to protect capital in event of an unexpected adverse outcome. 

Key features

Fund Inception date August 2017 (strategy inception October 2013)
Valuation Daily
Minimum investment Wholesale class - $20,000 
Professional class - $500,000
Buy/sell spread^ 0.30% on application; 0.15% on redemption
Entry/exit fees Nil
Management costs (ICR) Wholesale class - 0.98% p.a.
Professional class - 0.80%p.a.
Performance fee N/A
Distributions Usually last business day of June and December
APIR code Wholesale class SCH0095AU
Professional class SCH4757AU
mFund code SCH45 

^Subject to change. Refer to the Buy/Sell spreads page in the Fund Centre

Who does this fund suit?

The Fund is suitable for Australian investors that are seeking a high conviction strategy and are comfortable with the risks associated with an equity-based investment. Because the strategy will depart materially from index performance, in both directions, it is suitable for those investors with appropriate time horizons and a tolerance and patience for index deviation. 

The value investment team

The value investment team is a team of eight investment professionals who work together on the equities desk at Schroders. Over the past decade we have implemented a value investment strategy, a contrarian and proven approach to investing. The value investment team is responsible for over A$20bn assets (at 31 December 2016), managed in a disciplined value style.  The three lead portfolio managers for the Schroder Global Recovery Fund are:

Nick Kirrage, Fund Manager, Equity Value joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Nick and Kevin Murphy took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, they both also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

Andrew Lyddon, Fund Manager, Equity Value joined Schroders as a graduate in 2005 and has spent most of his time in the business as part of the UK equities team. Between 2006 and 2010 he was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 he joined Nick Kirrage on the UK value team.

Simon Adler, Fund Manager, Equity Value joined Schroders in 2008 and the Global Value Team in July 2016, commencing his career as a UK equity analyst and previously a sector analyst responsible for Chemicals, Media, Transport, Travel & Leisure and Utitlites.